Will the G20 Finance Ministerial in Shanghai Lead Global Financial Regulation in the Right Direction?
Kateryna Dzhaha, Researcher, G20 Research Group
February 19, 2016
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On February 26th and 27th, 2016, G20 finance ministers and central bank governors will gather in Shanghai for their first meeting during China's year as host of the G20 in 2016. The world is watching and wondering with unusual anxiousness and anticipation about how they will address the many serious issues that are now afflicting the global economy and the financial system.
The first of these challenges is slowing growth in the global economy. The second is the prospect of another global financial crisis catalyzed by defaults by oil and commodity exporters, such as Venezuela, Azerbaijan and Nigeria, as well as systemically important G20 members such as Russia and Brazil. The third is persisting currency depreciation in emerging markets, which puts other central banks into a difficult position. The fourth is the uncertainty about China's ability to serve as a source of financial security at times of such crises and stress, given the instabilities in its stock market, the decline in its exchange rate, the slowdown in its economy and the continuing substantial losses in its once formidable foreign exchange reserves as outflows of capital from China continue at an unusually fast pace.
The hopes are high that the gathering of finance ministers and central bank governors will calm market anxiety, and even higher about the role that China is to play here. For its part, through its G20 presidency, China aspires to convince the world's leading economies that it is able to maintain stability and remain a reliable partner. The renminbi's recent appreciation came as no surprise thanks to China's tradition of allowing its currency to rise in the run-up to G20 meetings. According to Bank of America Merrill, China has made this move before eight of the last ten leaders' meetings.
Global growth will definitely be high on the February meeting's agenda, as the Organisation for Economic Co-operation and Development (OECD) has cut its 2016 forecasts to 3% down from 3.3%. In their draft statement, European Union finance ministers highlighted the need to boost global economic growth as one of their main messages for the Shanghai meeting. Their proposal to review and adjust the growth strategies agreed at Brisbane Summit in 2014 will very likely be supported by all G20 members. It is not clear, though, which measures will be encouraged to achieve growth. In its new report, the OECD urged the G20 to seriously consider supplementing monetary instruments with fiscal stimulus to create stronger growth. However, this policy may find opposition from Germany and other countries that are wary of fiscal deficits and have been embracing austerity measures. G20 members have been relying predominantly on monetary policy, with such members as the EU and Japan even resorting to negative interest rates to averse increased saving and decrease in demand.
The current instability makes it hard for finance ministers to avoid the discussion about their progress on making the global financial system more robust and resilient to possible new waves of the global financial crisis. The implementation of core financial regulatory reforms has been slow, which greatly undermines the G20's ability to adequately protect the world from the next global financial crisis. The issues of shadow banking, over-the-counter derivatives and cross-border resolution of financial firms, in particular, require urgent action. Unfortunately, there has been no sign that the G20 finance ministers will come up with new strategies to speed up the implementation of reforms at their Shanghai meeting.
The Shanghai meeting is also a good opportunity for finance ministers and central bank governors to discuss ways to coordinate their exchange rate policies. The persistent currency wars are directly linked to the global economic slowdown by the decreasing competitiveness of developed countries due to capital inflows and currency appreciation, which also exerts downward pressure on demand in emerging economies, which in turn further slows the global economy. Japan, with a currency that has reached its strongest point in over two years, is likely to push for capital control measures in emerging markets in order to prevent capital outflows triggered by the increased U.S. interest rate and the general instability. China, however, may oppose this proposal due to its reluctance to abandon the chosen course of liberalization, where it has made progress in getting the renminbi included in the International Monetary Fund's basket of Special Drawing Rights. Nevertheless, at Shanghai, G20 finance minsters and central bank governors might at least agree to increase the links among their central banks and improve communications.
Attention remains focused on China. China's economic management can now rival U.S. Federal Reserve policy as a key concern for the global economy. Although its policymakers have tried to send positive signals to their G20 counterparts by allowing the renminbi to rise and assuring that capital outflows return to normal before the meeting in Shanghai, they need to do more. China can set an example for other G20 members by managing its economy effectively, as it has a major impact on global financial security. The People's Bank of China can improve its communications on monetary policy, impose capital controls and foster fiscal stimulus to increase demand. Indeed, China's foreign reserves are not infinite, and China cannot continue to cure its economic woes by spending them indefinitely, taking into account that it has already spent $650 billion in the last 15 months. China's good political will can send a positive signal to the global economy and has great potential to get global growth back on track.
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Kateryna Dzhaha, MA, is a researcher with the G20 Research Group, the G7 Research Group and the BRICS Research Group, with a focus on financial regulation and supervision, international trade and international environmental policy. She holds a master's degree in international public policy from the Balsillie School of International Affairs, Wilfrid Laurier University, as well as a master's in international economic relations from Taras Shevchenko National University of Kyiv. Kateryna worked as a graduate research fellow at the Centre for International Governance Innovation, where she was involved in a year-long research project on cross-border resolution of financial firms.
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